A person who trades in stocks is known as a stock trader, and the transactions he/she carries out in this process is called stock trading. There are many forms of trading. If an individual is planning to trade in the stock markets, they should learn and understand the various methods/techniques of trading and choose the one that appeals to them.
Types of stock trading
· Day trading
Traders who engage in day trading are called day traders. The technique of day trading is that the purchase and sale of stocks happens on the same day, i.e. all transactions are closed on the same day. This type of trading demands quick thinking and immediate action and is not suitable for beginners who are new to the stock market.
Day trading branches out into many sub-categories:
This technique focuses on the slight differences in the prices of financial instruments. Whenever there is a difference in the price of a financial instrument between two markets, the trader or the arbitrageur will buy the securities for a low price and sell it back for a higher price.
Market makers are individuals appointed by major stock exchanges to provide bid and ask rates that help stock traders buy and sell their stocks.
Momentum day trading
This trading focuses on the trending stock of the day, where traders attempt to cash in on the momentum/volatility of the stock on a given day.
Volatility is a distinguishable feature of the market. The graphs of the stock market go up and down leading to the formation of various patterns known as chart patterns. Pattern trading gives more consistent and profitable trades in the long run.
This is a quick trading technique where the trader makes profits by carrying out many numbers of trades for the day. Scalping helps traders garner profits from the differences between the ask and bid prices.
Swing trading is a technique that focuses on the price of a stock on the beginning of the day and the closing price of the stock for the same day. This method focuses on the price differences and the movement in the stock.
Many stocks witness fluctuations in their prices when press releases are announced. The trader can trade any financial instrument that is backed by a press release and profit from the trade. Like other methods of day trading, this trading happens on the same day.
· Short-term trading
This type of trading entails the trading transaction to have a shelf life of a day to a few weeks. The short trade starts by buying the financial instruments with a holding period of a day or few weeks. The trader will create a sell position in this technique.
· Medium-term trading
The trade of a few weeks to few months is known as medium-term trading. This trading indicates the stock has the potential to reach a high position in the future.
· Long-term trading
This technique of trading is mostly used for stocks that have long standing in the market. These stocks have the potential to become profitable by the day, so the holding period of these stocks ranges from few months to a few years.
There are many other different types of stock trading other than the types mentioned above, and they are:
· IPO trading
· Exchange-Traded Funds (ETF) trading
· Futures trading
· Options trading, etc.
Trading in stocks does not always guarantee high returns, but diligently learning and applying some of these techniques can help traders make consistent profits in the long run.